Domestic Systemically Important Banks of India

2019 ias preliminary exam test series

The Reserve Bank of India has identified State Bank of India (SBI) and ICICI Bank as Domestic Systemically Important Banks (D-SIBs) in 2016. The additional Common Equity Tier 1 (CET1) requirement for these banks has already been phased-in from April 1, 2016 and would become fully effective from April 1, 2019.

Domestic Systemically Important Banks (D-SIBs):

The D-SIB Framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs every year in August starting from August 2015.

The Framework also requires that D-SIBs may be placed in four buckets depending upon their Systemic Importance Scores (SISs). Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it, as mentioned in the D-SIB Framework.

Some banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become systemically important.

The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity.

Therefore, the continued functioning of Systemically Important Banks (SIBs) is critical for the uninterrupted availability of essential banking services to the real economy.

The D-SIB Framework specifies a two-step process of identification of D-SIBs. In the first step, the sample of banks to be assessed for systemic importance has to be decided. The selection of banks in the sample for computation of SIS is based on analysis of their size as a percentage of annual GDP.

Further, as mentioned in the D-SIB Framework, in case a foreign bank having branch presence in India is a Global Systemically Important Bank (G-SIB), it has to maintain additional CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.

The methodology to be adopted by RBI to identify D-SIBs

The process of assessment of systemic importance of banks will be a two-step process. In the first step, sample of banks to be assessed for their systemic importance will be decided.

It is felt that systemic importance of all the banks need not be computed as many smaller banks would be of lower systemic importance and burdening these banks with onerous data requirements on a regular basis may not be prudent.

Hence, the sample of banks for identification of D-SIBs may exclude many smaller banks. Once the sample of banks is selected, detailed study to compute their systemic importance could be initiated. Based on a range of indicators, a composite score of systemic importance for each bank in the sample will be computed.

The banks having systemic importance above a threshold will be designated as D-SIBs. D-SIBs would be segregated into different buckets based on their systemic importance scores, and subject to loss absorbency capital surcharge in a graded manner depending on the buckets, in which they are placed.

A D-SIB in lower bucket will attract lower capital charge and a D-SIB in higher bucket will attract higher capital charge.

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